What Does the Bond Market Have in Common With Prince?

November 16, 2012 8:53:00 AM

(Photo courtesy of Nicolas Genin)

It seems they both want to party like it's 1999!

You may be asking how I would have come up with such an analogy? It's simple.

Does anyone remember the S&P 500 in 1999? Maybe you were one that couldn't wait to invest your money into the market and particularly the S&P 500.

If so, you were not alone.

Additionally, many investors sold what they perceived as under-performing investments and piled into the S&P 500 not realizing how much they were paying to invest in the popular index.

What Was the S&P 500 PE Ratio in 1999?

Roughly 29x forward corporate earnings.

As 1999 was coming to an end, investors were celebrating the tremendous performance in the index, with many saying, his time it's different.

Investors were truly enjoying the stock market party.

However, all parties must come to an end. And, just as the party for the S&P 500 ended, so will the party in fixed income returns many have enjoyed over the last 10 years.

Does anyone see any similarities?

In actuality, I believe the investor personality in 1999 was one of greed. The idea that the investor hates missing out on a rising stock market.

The problem with that strategy is this: one day, investor fear also ends. Just as the party ended for the rising S&P 500, so the bond party will come to an end.

To offer some perspective, today the S&P 500 trades at roughly a forward looking 13x 2013 earnings. That's more than a 50% discount compared to the stock market craze in 1999!

However, investors today are not willing to invest in the S&P 500 (or the stock market for that matter) like they did in 1999. Yet, they are willing to invest in fixed income investments-many of which are paying yields less than inflation!

I believe, today, many (not all) investors are piling into bonds not because of the tremendous returns over the last 10 years, but, more out of fear.

Yet, just as the party eventually ended for equities in 1999, so will the fear of the stock market today and the safe haven many investors view the bond market as today.

Once that happens, investors will once again be faced with the potential ramifications of rising interest rates and the negative impact to their portfolio.

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Mark Pearson

Mark Pearson

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